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THE 



Economic Primer 



A SUMMARY OF THE PHILOSOPHY OF LOWER 

PRICES, HIGHER WAGES AND 

SHORTER HOURS 



By Arthur Burnham Woodford, Ph. D. 

Professor ofEconomics and Politics at the School of Social Economics 



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ADVANCE SHEETS 



NEW YORK 

School of Social Economics 

34 Union Square 







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CONTENTS. 



Principles of Production. 

Chap. I. Character and Function of Wealth. 
Chap. II. Money, a Medium of Exchange. 
Chap. III. On the Law of Prices. 

Principles of Distribution. 

Chap. IV. Wages and the Development of the Factory System. 

Chap. V. On the Law of Wages. 

Chap. VI. On the Law of Rent. 

Chap. VII. Interest and Profit. Parts of Economic Surplus. 

Questions of Economic Policy. 

General Principles of Statesmanship. 

How American Industry can be Protected. 

Should Immigration be Restricted ? 

Are Taxes Economical? 

Should Laborers Share in the Economic Surplus ? 

Do Trade Unions Benefit Workingmen ? 

Are Trusts Dangerous ? 

Should the State own all the Agents of Production ? 

Can Industrial Depressions be Prevented? 

Are Eieht Hours Enough ? 



On the History of Economic Theory. 



CHAPTER 1 



CHARACTER AND FUNCTION OF 
WEALTH 



I. — Economic Science. 

• Social economics is the science of the industrial life 
of man. It deals primarily with the material welfare 
of mankind, the conditions of well-being in society, and 
with the influence of industrial forces upon the mental 
and moral development of the race. It deals with human 
wants as motives to economic activity; with the means 
of getting a living, and with social institutions in so 
far as these have an industrial foundation. Social 
economics has to do with trade and commerce, with 
industrial organization, and the effects of political forms, 
of laws, and of moral codes on the industrial condition 
of society. It explains changes in agriculture, manu- 
factures and transportation ; fluctuation in prices ; vari- 
ations in wages ; the distribution of population ; the 
location of industries ; the rights and duties of employer 
and employee. It concerns the forms of industrial life, — 
slavery, serfdom, the wage system; the kinds of indus- 
try, — agriculture, trade, manufactures, transportation ; 
the characteristic features of industrial life, — prices, 
wages, rent, interest, profits ; and the relationships 
existing under various systems, — that of slaves and 
owners, serfs and masters, employers and employees, 
capitalists and wage-earners. 

The social economist studies ways of living and 
working in society ; he investigates the industrial 



6 The Economic Primer [Chap. 

habits of men and women, groups the facts of human 
nature, and seeks those lines of uniformity whose 
statement constitutes a scientific law. For instance, 
he studies the history of prices, and endeavors to make 
a generalization concerning the trade experiences of 
mankind; recognizing that the popular definition of 
wages, as the price of labor, is truly scientific, he looks 
to the laws of price for an explanation of all changes 
and differences in wages, — why wages are ten cents an 
hour in one place and ten cents a day in another ; why 
the wages of the English agricultural laborer rose from 
a penny a day in 1300 to is. 6d. in 1800 and to nearly 
^s. at the present time, while in some parts of Russia, 
in India, in China, wages are now not over six pence a 
day ; why mechanics in New York City receive as high as 
five dollars per day and the hod-carrier only two dollars. 

The social economist explains why the power-loom 
superseded the hand-loom and the railroad displaced the 
stage-coach; why the city street was built upon the 
country lane ; why these changes occur sooner in one 
country than in another; why slavery still exists, and 
the reasons for the change from slave conditions to 
serfdom, and for the still more important change to the 
wage system. 

But all this study is not merely for the comprehen- 
sion of past changes; the practical result arrived at is 
the suggestion of new modes of life. and that direction of 
public policy which shall secure rightly and rapidly a 
still higher type of society in the present and future. 
The social economist searches for the reasons under- 
lying the constant changes in social and industrial 
institutions only with a view to their rational perfection. 

2. — Man's Relation to Wealth. 

No study is of greater importance to the welfare of man- 
kind. The social economist studies the manifold ways 



I.] Types of Industrial Organization 7 

in which man attempts to create wealth, — the thousand 
and one devices to economize human life and energy, and 
compel the natural forces outside of man to supply the 
human family with the means of life and of social com- 
fort. Economists investigate the use made of wealth 
in the satisfaction of the physical, mental, moral and 
social wants — wealth always being regarded as the 
most important means to a higher social life. 

Whatever may be said of wealth as an end, its existence 
marks the difference between civilization and barba- 
rism. A people must remain barbaric without it, how- 
ever corrupt the abnormal accumulation or uneconomic 
use of it may render the nation. 

Wealth has been constantly regarded with increased 
importance from the beginning of history. Everywhere 
and under all conditions man has been seeking for 
more wealth. As his individual wants have been in- 
creased, either in quantity or quality, so he has con- 
stantly required more wealth for their gratification. 
Every device has been invented for making nature 
yield more of her bounty. Every social condition has 
been improved that man may have more to satisfy his 
wants, physical, mental and moral. This gives us the 
key to our subject ; we are to study man seeking 
wealth because of the service which it is to him. In 
the past the acquisition as well as the consumption of 
wealth has been largely empirical and at haphazard. 
Social economics can justify itself only by substituting 
scientific precision in the economic policy of the 
nations of the earth. 

3. — Types of Industrial Organization. 

Although the changes in industrial and social forms 
have been of an almost infinite number, when distin- 
guished by their slight variations and almost insensible 
gradations, yet there have been, broadly speaking, but 



/ 



g The Economic Primer [Chap. 

three distinct types : slavery, serfdom and the wage 
system. As soon as man emerges from a simple, 
individual, and largely animal life, in which the sci- 
ences of ethnology and anthropology everywhere have 
found him, human slavery is to be seen, and has con- 
tinued as a form of social life down to the present time. 
It was the first step from primitive barbarism toward 
perfect civilization. Being of service to a portion, at 
least, of mankind, in that it saved labor — the aim and 
condition of every industrial advance — it was generally 
adopted. Differing from what precedes, it served to 
fill the gap between the nomadic condition and prepare 
the way for feudalism and its successor. 

A slave is simply property for the service of his owner, 
and receives the "reward of labor" — his living — as 
does a horse or any other animal. He is absolutely 
the victim of his circumstances, may be bought and 
sold, separated from wife, children or place of nativity, 
and is without liberty of opinion. He walks under the 
rod, with no opportunity to defend himself against the 
power of his master or the less humane overseer. He 
is simply a beast, like them supposed to have no desires 
worthy consideration. He is of value only as he 
serves others in obtaining wealth for the gratification 
of their wants. Even this social state is an advance 
over the preceding condition. He is pretty certain of 
regular food, suitable clothing and a place to sleep, 
with which the master has to supply him in order that 
he may be kept in good working order. The uncertain, 
irregular life of the savage has given place to the sys- 
tematic security of crudely organized, but yet organ- 
ized, industry. 

Serfdom is the next higher, distinct type of industrial 
organization. A serf is bound to his lord's estate and can- 
not be detached from it. He is governed by the lord. His 
residence is fixed, but, unlike the slave, what he eats 



1.] Fundamental Institutions 9 

and wears is determined by his own desires. He may, 
by his own efforts, live better than any slave. A part 
at least of his time is his own. He has land which he 
may cultivate, rights of pasturage for his flocks, and 
the privilege of gathering fuel on the domain of his 
manorial lord. In exchange for labor dues, he receives 
such protection as his lord sees fit to accord. 

Under the wage system, man ceases to be attached to 
other men or to the land. He is no longer a ward, 
subject to the absolute will of others. Instead, he is the 
seller, not the sold. Labor and not the laborer is exposed 
for sale in the market ; service and not man is the object 
of purchase. The wage-earner works not because of a 
whip held over him by a master, nor because of the 
exorbitant demands of a lord, but because he has 
desires of his own which he seeks to gratify. His rela- 
tion to those for whom he works, to the products of his 
own labor, and to the community, is altogether different 
from that of the slave or serf. For his service he may, 
to an extent, determine the price. He is not dependent 
upon the bounty or generosity of a lord or master. He 
is responsible to himself for the support of himself and 
family. Over his produce he has no control. For the 
labor he bestows upon it he receives a price previously 
determined by a definite contract between himself and 
his employer. 

A large part of the workers in the western world are 
under this wage system ; but it is necessary to note that 
all are not. The bootblack, the independent cobbler, 
the peddler on the street, the lone farmer who tills his 
own little plot of ground, the sweater's workers under 
the roof, are not yet wage-workers. 

4. — Fundamental Institutions, 

These three types of industrial organization, slavery, 
serfdom and the wage system, have successively 



lo The Economic Primer [Chap, 

marked the progress of civilization. The change from 
one to the other has been a slow and gradual evolution; 
it is "a continuous, progressive change, according to 
certain laws and by means of resident forces." Each 
of the lower types, although practically superseded, 
has left marks upon the social organism not yet cleared 
away. With the merging of the lower into the higher, 
of the simpler into the more complex, institutions 
have been developed, so deeply rooted in human 
nature, so vital to the industrial organism, that they 
may be regarded as essential to its very existence, — 
such as the family, private property, church, state and 
court. 

In the present state of our knowledge the attempt to 
classify social phenomena is of little scientific value. 
Sociology has as yet advanced but little beyond a 
descriptive science. But a working basis or suggestive 
guide for further study and the comparison of different 
nations may be found in the following outline : 

SOCIAL 
Institutions Relations Sciences 

Family .... Domestic . . 

State Civic or Public . . Politics 

Church .... Ecclesiastical . . 

Court . . . . . Legal Jurisprudence 

School .... Educational . . Pedagogics 

Industrial . . . Economics 



Intellectual 



{Science and 
Philosophy 

Moral Ethics 

(Esthetics 
"Social" . . .-] ''Culture" 
( Linguistics 

One marked characteristic of modern life is strong 
monogamic relations. The social unit is the family of one 
man and one woman with their children, each and all 



T.] Divisions of Industry ii 

having more or less clearly defined rights and privileges 
toward each other and against the rest of mankind. 

Almost equally important is the institution of private 
property, both in the products of man's effort and in 
the natural agents, over which he has acquired power. 
For the use of private property the owner may receive 
rent. For the use of capital the owner may receive inter- 
est. For labor or personal service wages must be paid. 

Each of these institutions stands on an equality 
before the law. For the observance of contract relations 
all parties are equally bound. All contracts must be 
faithfully kept, for they are the foundation of the whole 
current of modern business. Indeed, "one may say 
that modern society rests on the following fundamental 
ideas: the notion of country, family, liberty, property, 
civil and political equality in general, labor, faith in 
contracts freely entered into, obedience to the law and 
to the powers instituted to guarantee security to society 
and to each of its members, and, finally, on the ensem- 
ble of moral and religious beliefs, which instruct and 
strengthen the soul, and temper certain suggestions of 
individual interest with inspiration of equity, of devo- 
tion, and of self-denial." * 

5 Divisions of Industry. 

Speaking broadly, wealth is produced in three differ- 
ent ways: (i) by agriculture and the extractive indus- 
tries; (2) by trade, commerce and transportation; and 
(3) by manufacture, in the common acceptation of the 
term. To obtain directly from nature the means of 
satisfying wants, by hunting and fishing, by raising 
flocks and tilling the soil, is still the industrial method 
of the larger portion of mankind. But agriculture is by 
no means the only source of wealth, as was maintained 
in the middle of the last century by the Physiocrats, a 

* Jourdan, Cours Analytique d'Economie Politique, p. 297. 



12 The Economic Primer [Chap. 

school of French economists who went so far in their 
revolt against the mercantilists as to regard land as the 
only source of wealth, and to limit the term production 
to its cultivation, or to its direct use, — as* in mining 
and forestry. Every other pursuit was considered 
unproductive. Those who labored in the field were 
producers; all the rest of mankind were sterile and 
unproductive. 

Adam Smith (1776) vigorously attacked this idea, and 
clearly demonstrated that all the various lines of trade 
and commerce are as truly productive as agricultural 
efforts. Indeed, they that go down to the sea in ships 
often contribute more to the world's well-being than do 
the hewers of wood and the drawers of water. Civil- 
ization advances with increased speed only with the 
development of commerce, manufactures and the artis- 
tic industries. 

In the primitive community, each individual satisfies 
his wants by his own unaided efforts. For -food, cloth- 
ing or shelter he is dependent upon himself alone. 
In the family is seen the simplest differentiation; the 
man hunts and fishes, the woman toils at home with 
cooking and the making of clothes, and possibly culti- 
vating the soil a little. Between families barter takes 
place in the direct exchange of bows and arrows for 
food. Gradually this exchange takes place between 
individuals or families separated by some distance. 
When neither has time to go to the other, either to 
receive or to deliver the articles exchanged, the neces- 
sity is developed of a go-between, an intermediary, a 
middleman, who receives and delivers the goods. 
This, to those immediately interested, is a saving of 
time and an economy of effort. Each obtains more 
than before. The individuals and the community are 
the richer. As Emerson describes the process in his 
essay on Wealth, "the art of getting rich consists not 



I.] DivibUi.N.s OF L\uubiKv 13 

in industry, much less in saving, but in a better order. 
Steam is no stronger now than it was a hundred 
years ago, but is put to a better use. A clever fellow 
cunningly screws on the steampipe to the wheat crop. 
The steam puffs and expands as before, but this time it 
is dragging all Michigan at its back to hungry New 
York and England." 

But for the work done by the intermediary, who is 
not merely a transporter, but to a certain extent a trader, 
those whom he serves must render an equivalent. This 
must be sufficient to support him and his family, else 
he cannot continue the service. The better order must 
be self-sustaining. 

Later still the necessity will arise of having some 
devote themselves entirely to transportation while 
others will confine their work to trade, either wholesale 
or retail. At first the trading will be periodic, as at the 
great mediceval fairs; but soon it will continue through- 
out the year. The merchant then becomes a necessity 
to the life of the community, and an efficient agent in 
production. This further differentiation saves time and 
economizes effort. It is not a burden on any individual 
in the community, but distinctly contributes to the 
wealth and prosperity of all. In the same way is de- 
veloped the necessity and the utility of the drummer, the 
shipper, the banker, all of whom are employed because 
they perform a distinct function. So also in time arises 
the necessity of soldiers, policemen, lawyers, legislators 
and insurers, who by protection, or in other ways, 
serve the community. No division will be introduced 
and continued unless it is distinctly to the advantage of 
those served. Unless the new agents contribute in 
some way to the satisfaction of human desires, every 
one has an immediate interest in eliminating them from 
the industrial body.* 

* See Gunton's " Principles of Social Economics," p. 68. 



14 The Economic Primer [Chap. 

6. — Definition of Wealth. 

In entering upon the study of wealth and the law 
and order of its production, the questions to be con- 
sidered are: (i) What is wealth.? (2) Why is it pro- 
duced.? (3) What constitutes production.? 

In popular phraseology, the word wealth always con- 
veys the idea of an abundance of the things suited to 
gratify human wants and desires. Unfortunately the 
term has no uniformly accepted signification even 
among economists. Yet there are certain characteristics 
that must distinguish wealth from all other things. We 
must emphasize the fact that wealth is not a part of 
man himself, and yet it has no existence separate from 
man. It is peculiar to him as a social being. It is of 
service to him, and is created only at his bidding. 

We sometimes hear the expression "natural wealth"; 
but wealth is purely social. Only possibilities, or oppor- 
tunities, exist in nature. Natural includes whatever 
exists as the result of purely cosmic forces ; but nature 
is not wealth. Gold in the mine, fish in the sea, the 
mighty power of Niagara, iron and coal in the mount- 
ains of Pennsylvania, all these have existed for ages. 
The Indians roved over them. But none of these things 
were wealth until they were touched by the magic of 
man and made to serve him. The sun, wind and rain 
are not wealth. They serve man, minister to his needs 
and satisfy his wants. But they are gratuitous forces, 
whose services are rendered to man without the expend- 
iture of effort upon his part. If to obtain them he has 
to work, they become wealth. If he has to explode 
bombs, as was lately tried in Texas to obtain rain, or 
erect windmills or spread sails as on ships to obtain 
motive power, or build light-shafts as in the crowded 
tenements of the great cities, the product, — moisture, 
power or light, — is wealth. To call all sunlight wealth 



I.] Definition of Wealth 15 

is to break down the line of division between the phys- 
ical and the social or economic field. It must be neces- 
sary to expend human effort in order to put products of 
nature into the possession of those whose wants they 
are to satisfy, or they are not wealth. 

The term wealth includes only those things which 
are subject to human control. The falling dew may be 
very useful to man in the production of wealth, but 
being a result of purely cosmic influence, and not trans- 
ferable, it is not to be classed as wealth. Honesty is 
the best policy, but it is clearly an attribute of human 
beings ; it is a personal quality w^hich cannot be trans- 
ferred and made the subject of a business transaction. 
Virtue, intelligence, health, may be higher and better 
than wealth ; they may be means to wealth ; but they 
are not the thing itself. 

Man himself is not wealth unless he is a slave. 
Man's mental, moral and physical faculties are not 
wealth. They indicate what he is, not what he has. 
We shall define wealth, therefore, as any (i) useful 
thing (2) outside of man (3) whose utility depends upon 
the expenditure of human energy. 

This definition will include all things which are the 
product of human activities, adapted to the exigencies 
of social life, and actually satisfying some human want. 
A song, an oration, a sermon, a display of fireworks, 
a race, in so far as these are the product of man and 
for the service of man, are wealth. Thus it appears 
that the degree of duration, or the susceptibility of 
accumulation, do not necessarily enter into the defini- 
tion of wealth. A diamond is no more wealth than a 
beautiful song, although the former may be stored 
away and outlast many generations, while the latter 
gave satisfaction for but a brief moment, and ever after 
exists only as a sweet remembrance in the mind of the 
hearer. The songs of Patti and Nilsson, the perform- 



i6 The Economic Primer [Chap. 

ances of Shakespeare's immortal dramas by Booth and 
Barrett, the noble orations of Curtis, the inspiring utter- 
ances of Phillips Brooks, all served man for the brief 
moments in which they were being delivered ; yet they 
were wealth, and much of such wealth is far more 
humanizing and socializing in its influence than some 
forms of wealth which are susceptible of accumulation 
and repeated redistribution. 

7. — Production. 

Nothing being wealth which does not require the 
expenditure of human energy for the creation of its 
utility, it is clear that all labor which creates utility is 
productive. To extract raw material from the earth, to 
transport it, to change it by process of %ianufacture 
into new forms, to expose it for sale, to insure and 
protect it until it reaches the consumer, each and all 
are processes of production. The purpose and the 
result is the creation of utility, of things to satisfy 
man's wants and desires. Therefore we say that all 
efforts are productive which result, directly or in- 
directly, in imparting to matter any of the attributes, or 
surrounding it with any of the conditions, which make 
it available for the gratification of human wants or the 
satisfaction of human desires. Only those efforts are 
unproductive and economically useless which fail to 
achieve the object for which they were put forth, such 
as building a house that no one wants at the price it 
cost the owner, working an already exhausted mine, 
or sowing seeds in waste places. These are nonpro- 
ductive. These efforts are misdirected, and fail to 
gratify any human desires. 

We thus have one supreme industrial test of all 
effort. If we desire to know whether it is productive 
or not, we must ask the question, does it gratify a 
human want ? From this point of view it will be 



I.] Necessary Factors in Production. 17 

clearly seen that much of the effort regarded by some 
economists as unproductive, is indispensable to the 
making of many things which are useful to mankind. 
The farm hand, the workmen on the railroad, the clerks 
in the bank or the insurance office, the scientist, school- 
teacher, artist, any and all who contribute the quality 
of utility to any object, are producers. Moreover, the 
utility produced by ministers, actors, musicians, 
serves to gratify a very high order of human desires ; 
indeed, of all kinds of effort they are the most effect- 
ive in producing the new wants which constitute the 
incentive to the production of material things. These 
are as purely economic as those for the gratification of 
which the farmer raises wheat and wool, or the miller 
and the manufacturer expend further effort in preparing 
these materials for consumption. In each instance 
wants are satisfied. The erroneous idea, so largely 
prevalent among wage-workers and farmers, that 
middlemen are non-producers, and that rent, interest 
and profits are robbery, is the legitimate product of the 
self-contradictory doctrine that useful effort is non- 
productive. 

Another erroneous notion is that an article must be 
put on the market and sold, or the effort or service 
must be paid for in coin, else it is unproductive. A 
person who makes his own clothes, who raises his own 
provisions, who paints a picture or plays a musical 
instrument for his own amusement or that of his 
friends, is a producer, just as fully as the tailor, or the 
artist, or the market gardener. Each creates utility and 
gratifies human desires.* 

8. — Necessary Factors in Production. 

In the creation of utility it is sometimes taught that 
man alone does everything, that "labor'' is the only 

* See Gunton's " Principles of Social Economics," pp. 68-72. 



iS The Economic Primer [Chap. 

factor in production. Hence the cry that all the price 
received for anything should go to the laborer, and 
whatever is withheld, or given to others, is robbery. 
It is a fact that all production requires labor, and thus 
cost is imparted to all products. But labor is not the 
only factor. There are natural forces, such as the air, 
the heat and the light of the sun, and moisture, which 
also create utility, and almost always gratuitously. 
When this is true they add nothing to the cost. But 
when, in order to obtain the right quantity of air, the 
necessary degree of heat, the essential amount of 
moisture, it is necessary to expend labor or invest 
wealth, then these forces in production add to the cost. 
Some natural forces, such as steam and electricity, 
which are so essential to modern processes of produc- 
tion, can never be utilized without the expenditure of 
effort and the employment of wealth, thus imparting 
cost. Hence they are never used unless they bring in- 
creased returns. Wealth thus employed to assist pro- 
duction is distinguished from that used in consumption, 
and is called capital. 

In addition to labor and capital, land is a necessary 
factor in production. This is a natural agency, to be 
sure, but for purely historical reasons must always be 
separated from those heretofore referred to. We regard 
as land all wealth invested in and inseparable from 
land, and the return from it is called rent. 

All these three, then, labor, capital, and land, are 
necessary factors in the simplest, and, as well, in the 
most complex processes of production. No industrial 
product can be obtained without a combination of the 
three, although they are not always equally important 
in business, and they do not contribute equal amounts 
of productive force at the same cost. To understand 
their relations, the principle of their use, the advan- 
tages derived from each, the cost which each imparts 



I.] Capital 19 

and the returns which each must receive, are the prob- 
lems of social economics. 

9. — Capital. 

We have defined wealth as everything produced by 
man capable of gratifying human wants. But all 
wealth is not immediately put to this use ; some is set 
aside for and devoted to the production of other wealth. 
The wealth thus utilized is capital. Food and clothing, 
books and paintings, carpets and carriages, every form 
of wealth actually in use by the consumer, and n'o 
wealth is produced until it has reached this point, is 
consumable wealth. While the want-satisfying power 
is beins: added to wealth it is raw material. Wool, for 
instance, is used in the manufacture of cloth, but it 
cannot be said to have been consumed until the fin- 
ished product is actually made use of by the human 
being whose wants it satisfies. If it is made a part of 
a machine it becomes capital. All buildings, railroads, 
ships, and other forms of wealth used in processes of 
production, are capital. The consumer uses wealth 
directly for the satisfaction of his wants and desires as 
a part of the cost of his living ; the producer uses 
wealth, not directly for the satisfaction of his wants 
and desirA but to add want-satisfying qualities to other 
wealth. 

Capital is thus an industrial instrument, a tool whose 
use is necessitated by the increased demand for the 
services of reluctant natural forces, without which the 
modern industrial system could not be carried on for 
one moment. All capital is wealth, but it is a mistake 
to speak of a laborer's skill as his capital. Skill is not 
wealth, but an inseparable attribute of the personality 
of the individual. It is equally misleading to speak of 
capital as stored-up labor; labor is human energy and 
can be stored to a very limited extent only, and then 



20 The Economic Primer [Chap. 

only in the human being to whom it belongs — never in 
any form of wealth. It is precisely because laborers 
cannot save their labor from month to month, or sell 
this week's service next week, that involuntary idle- 
ness has such terrors for them. The failure to use, or 
the lack of opportunity to use, today's energy, means 
that it is lost forever. We never can use it at a later 
time.* 

10. — Use of Natural Forces. 

There is a limit to the power of the human being, 
which renders its use expensive in the processes of 
production. To substitute the power of reluctant nat- 
ural forces for man, to use cosmic instead of human 
energy, to exploit nature rather than man, is the es- 
sence of industrial progress. This is the function of 
capital in the industrial organism. Wherever natural 
forces are to be used, capital must be invested ; hence 
the two terms are synonymous in industry. The one 
cannot share in production except by the use of the 
other. Capital becomes thus the servant and the bene- 
factor of the community. It saves labor, reduces cost, 
lowers prices, abolishes the poverty and ignorance, 
the despotism and superstition which characterize the 
hand-labor system, and makes possible the gjatification 
of more wants and desires, both extensiv^and inten- 
sive. All this increased use of nature makes man 
richer. 

Electricity would not be cheap for light or power if 
it were not for the application of capital. Niagara was 
not harnessed and its almost immeasurable power 
made to serve man until capital was invested. But 
the capital is invested only because of a probability of 
profit. Nature must be made to work in such a way that 
man may obtain not only the same product for less 

* See Gunton's " Wealth and Progress," pp. 17-18. '■ 



I,] The Necessity of an Extending Market 21 

energy, but a much larger product for the same expend- 
iture, thus yielding increased returns by increasing 
the ratio of income to expenditure. 

II. — The Necessity of an Extending Market. 

But the increased production is unnecessary and un- 
profitable unless the market can be so extended as to 
consume the increase. If the traditional amount only 
is to be consumed, the new method will be no more 
desirable than the old, and will not call forth the in- 
vestment of capital. Improved methods of production 
usually require the expenditure of such large amounts 
of capital that increased consumption and more ex- 
tensive markets are the condition of their successful 
use. A modern manufacturer can make in a single day 
all the pens which the monks of the middle ages could 
have used. Quills were cheaper for them, but are 
dearer for us. Then it was books which were dear and 
men cheap ; now the books are cheap and the men 
dear. But if the number of readers and users of books 
had not vastly increased, it would still be cheaper to 
copy them by hand than to manufacture a modern 
printing-press. Hand labor prevailed in the primitive 
community and was cheap because of the small mar- 
ket. It still characterizes the industrial organism in 
partially developed countries like Mexico and South 
America. In such countries the hand-labor system is 
cheaper than the capitalistic system. Tallow candles 
for lighting on a very small scale are cheaper than 
electricity. Where only a few ride, the primitive jin- 
rikisha is cheaper than the railroad. Rapid transit 
systems are not perfected in our great cities for the 
benefit of the aristocracy, but for the great mass of 
travelers. For the aristocracy, who must have a cer- 
tain style of exclusiveness, private coaches are still the 
cheaper. Rapid transit is still unknown in the great 



22 The Economic Primer [Chap. 

cities of China ; there is an immense population, but 
few have occasion to ride. Thus we see how, in order 
to make use of capital in the harnessing of natural 
forces, we must have numerous and increasing wants 
to be gratified, which means a constantly extending 
market. With such a market reasonably well assured, 
capital is not slow to enter into the business of supply- 
ing it. Given a demand, and a supply will be forth- 
coming as soon as it is possible to produce it. Increase 
the demand so that it will be profitable to employ nat- 
ural forces, and capital will at once unite with them, 
and utilize them in the productive process. Every- 
where and always it is consumption that causes pro- 
duction. Greater demands will be successfully made 
on nature only as a result of increased per capita con- 
sumption of wealth, and in response to a growing com- 
plexity of social desires on the part of an increasingly 
large portion of the community. 

12. — Importance of Social Wants. 

Human desires and wants are to be divided into two 
distinct classes, having specific characteristics, modi- 
fied by quite different influences and occasioning unlike 
industrial results. The wants which are mainly directed 
to sustaining life are largely supplied by agricultural pro- 
ducts, and involve isolating occupations, like farming 
and cattle raising. Such wants can only be developed 
in quantity to a limited degree in each individual. But 
the wants which arise from the quickening influences 
of social intercourse, and which are produced and 
modified by our intellectual, moral and aesthetic 
natures, can be indefinitely increased in number and 
extent in each individual, and may consequently mul- 
tiply much more rapidly than the population. The 
objects of social desire are at first luxuries, then com- 
forts, and by constant use become the necessities of 



I.] Importance of Social Wants 23 

life. It is these wants, the products of social intercourse, 
which furnish the demands for distinctively manufac- 
tured products, leading- to concentration of population 
and the adoption of more socializing occupations. It is 
in the effort to satisfy these desires, and not because 
of mere additions to populations, that man is forced to 
use machinery and adopt better methods of production. 
Here then is the force that calls forth capital. 

The use of capital, however, means the displacement 
of labor. Were this the net result it would be a catas- 
trophe and lead in fact to the defeat of the new method, 
because each unemployed laborer would cause a 
diminution in the market. This explains in a measure 
the inordinate desire for a foreign market. It is thought 
that this is the only way by which the displaced labor 
can be used. But there is another natural method of 
overcoming the difficulty, which is constantly at work, 
and one which all can assist in furthering. This is 
making the multiplication of wants more rapid than the 
increase of men. Labor-saving machinery will not 
then produce enforced idleness, for the new wants will 
call for new methods, and will create the conditions of 
eniployment for discharged laborers. 

Here we see a constant round. Each addition to the 
wants of an individual means a demand for a larger 
quantity and a greater variety of products. This means 
the adoption of new methods. The new methods 
mean the employment of new laborers and the bring- 
ing of new socializing influences to bear upon them, 
the creation of new wants and so the same round as 
before. It is peculiarly the higher social wants that 
contribute to this end. Their development not only 
makes the use of capital necessary, but socially pos- 
sible. Their influence is cumulative in producing dif- 
ferentiation of industry and increasing the complexity 
of economic life. A slight growth in the per capita 



24 The Economic Primer [Chap. 

consumption of the laboring classes involves an im- 
mense addition to the market and leads to manufacture 
on an increasingly larger scale. This results in a low- 
ering of the price and puts the product within the reach 
of a still larger number of consumers. 

The addition of new wants by the laboring classes 
also raises the standard and the cost of their living, 
other things remaining the same. Consequently the 
cost which they impart to the product of their labor is 
increased. To offset the inevitable demand for higher 
wages, the capitalist seeks for cheaper methods of 
production. This means another lowering of prices, 
so that high wages and low prices may be correlative 
terms. The incentive to economize labor is strongest 
where the cost of it is highest, and at the same time here 
is the greatest opportunity for the successful use of 
capital. 

Thus the economic movement is constantly progress- 
ive. Everything is contributing to the increase of 
social wants and desires. They in turn furnish the 
very conditions under which man is saved and nature 
becomes constantly more serviceable. Man is raised 
in his ability to appreciate life, and in his power to 
create wealth. Wealth is always coming more into the 
reach of man; wages are raised; prices are lowered. 

13. — Capital the Result of Progress. 

The intimate connection between the incre^e of 
capital and the progress of civilization leads many to 
consider that capital is the cause of progress. Capital- 
ists flatter themselves that industrial progress is mainly 
due to their self-sacrifice and social martyrdom, and that 
therefore the laboring classes are under eternal obliga- 
tions to them. Such teachings are as false as the socialist 
doctrines that the laborer is the sole producer of wealth, 
and the capitalist an economic robber. Capital is the 



J -] Parsimony 25 

result of Drogress rather than its cause. True, it saves 
labor, but primarily because labor is too expensive, 
and nature a cheaper workman. Even in the most 
primitive stages of industry the initial investments are 
made with a view of securing a greater ultimate amount 
of pleasure and profit, not indeed for the consumer, but 
for the capitalist— the producer. Instead of the labor- 
ers being indebted to the capitalist for their prosperity, 
it is just the opposite. It is the extension of the habitual 
wants of the masses of the community which has made 
the existence of the capitalist a necessity, and his suc- 
cess possible. And this will always be true. 

Nature does the least for man, capital is the least used 
in the production of wealth, where the social life of the 
community is least complicated, where wants are the 
fewest, and where the per capita consumption of wealth 
is the smallest. There are no capitalists among the 
Esquimaux, because there is no economic use, no prac- 
tical need, for capitalists. The social habits of the peo- 
ple are so simple, that they can personally supply their 
wants with the rudest tools far more cheaply than with 
the complicated machinery of our civilization. 

14. — Parsimony. 

Nor is capital the result of abstinence, of self-denial, 
of "saving," of parsimony, as is so often claimed. 
Capital comes from production and creation, not from 
restraint. It is born and invested again in the hope of 
gain. What great capitalist goes without anything? 
The multi-millionaires could not by any possibility 
spend their income in the securing of the satisfaction 
of their personal wants. The capital invested in the 
great railroads and other industries is drawn from the 
profits which are over and above the cost of living of 
its owners. It is not probable that one per cent of the 
world's present capital is the result of personal sacrifice. 



26 The Economic Primer 

It is liberality, not parsimony, judicious expenditure 
and not niggardly scrimping, that promotes social life, 
increases prosperity and raises the level of civilization. 
The proverbs of saving which abound in our English 
language are only half true. Economic literature in 
its praises of abstinence is equally mistaken. The vir- 
tue of having wants and supplying them is ignored. 
Yet it is just this that makes possible the use of capital 
and the extension of man's control over nature. Nature 
will not work cheaply for a few. Factory methods of 
production did not supplant hand labor until the latter 
was inadequate to supply the demand for textile fabrics 
and the other conveniences of life, which are now 
necessities. The priest was able to copy books more 
cheaply than could be done by any other method, until 
the mass of people began to read. It does not pay to 
invest capital in any industry while the market is small. 
If, in the olden days, the ruling classes had used their 
power to develop instead of repress the social desires 
of the common people, the history of civilization would 
have been quite different. It is the extension of social 
wants and desires, not the parsimonious simplicity 
urged by our fathers, that increases progress. He who 
creates two wants where there was only one is the 
greatest benefactor of humanity. 

Summary Concerning Wealth. 

1. Wealth is anything the utility of which is created 
by human effort. 

2. Capital is wealth used in the creation of other 
wealth — the tools and machinery required in order to 
make use of the forces of nature. 

3. Natural forces (capital) become cheaper and sup- 
plant human energy (labor) in production in proportion 
as the social wajits of the members of the community 
increase. 



CHAPTER II 



MONEY, A MEDIUM OF EXCHANGE 



15. — The Origin of Money. 

In primitive society each individual produces all 
things necessary for the satisfaction of his own w^ants. It 
is only as individuals begin to produce things to satisfy 
desires of others that trade commences and money be-, 
comes a necessity. One of the evidences of an advanc- 
ing civilization is to be found in this differentiation of 
industries. At first the trade is simply barter, — the 
direct exchange of commodities between parties each 
of whom desires what the other possesses more than 
he desires that which he has in hand. 

A farmer desires shoes. He has apples which are 
less useful to him than shoes, so he seeks a shoemaker 
who desires the apples, and who will receive them as 
the economic equivalent of a pair of shoes. This is 
barter. 

But this direct exchange cannot always continue. 
The farmer and the shoemaker have a variety of wants 
which necessitate trade with a number of different 
people. When the people of a community desire to 
exchange articles for which they cannot give a sufficient 
quantity of an acceptable commodity, money becomes 
necessary, and some form of wealth, or promise to pay 
wealth, comes to be used as a medium of exchange. 
Under such circumstances what the shoemaker will 
accept from any one as the econorriic equivalent of a 
pair of shoes must be something that he can pass on to 



28 The Economic Primer [Chap. 

other members of the community and which will be 
equally acceptable to all. This something is money. 

Many different articles have thus been used, the teeth 
of whales in Fiji, olive oil in the Ionian Islands, dogs by 
the Esquimaux, cattle (whence our word pecuniary) by 
the Romans, salt in Abyssinia, leather in Carthage, and 
tobacco in Virginia. The catalogue is a long one, con- 
sisting of over a hundred different articles, from agate, 
amber and bananas to wheat, whiskey, w^oodand zinc; 
it includes beads, shells, tea, tobacco, sheep, slaves, 
horses, iron, copper and the precious metals, coined 
and uncoined. In all cases where wealth is used as 
money, the trade is still a species of barter, the exchange 
of wealth whose value is more or less exactly and gen- 
erally understood, for other wealth, desired to satisfy 
some particular want. 

Thus money is the medium of exchange; facilitating 
trade and enabling the satisfaction of wants where 
there is not a coincidence of desires. By its use trade 
becomes complex, exchanges are extended in time, 
future satisfaction is substituted for the immediate, and 
credit is utilized without in any way violating the equity 
of an economic transaction. In this way money 
becomes the most important institution connected with 
the production and exchange of wealth. It is to indus- 
try what blood is to the human body. Without it, pro- 
duction on an extended scale cannot take place, and 
trade beyond the simplest barter is impossible. 

i6. — The Relation of Money to Wealth. 

But pure money is accepted not as wealth, but as a 
substitute for wealth. The shoemaker accepts money 
from the farmer in lieu of wealth. It is of absolutely 
no use to him except as he can exchange it for wealth, 
and he receives it because wealth cannot then be given. 
It is an evidence of debt by means of which he can 



II.] The Relation of Money to Wealth 29 

obtain from others, at some other time and place, wealth 
suited to his needs. A laborer receives two dollars per 
day. That is his nominal wages. He cannot eat it 
or drink it. But he can exchange it for food, clothiDg, 
shelter, amusement and other forms of wealth. These 
are his real wages ; these things actually satisfy his 
desires. Money is received on the assumption that it 
will be taken without any discount in the community. 
Wherever money ceases to be so received in that degree 
it ceases to be money. Money is money by virtue of 
its being current, not because of the property it may con- 
tain. A silver dollar at the present time contains only 
about fifty-nine cents' worth of silver, yet it is received 
by all for one hundred cents. Some seven or eight 
different kinds of money — ''dollars" — are in circula- 
tion in the United States for convenience in trade; 
bronze pennies, nickels and subsidiary silver coins, 
treasury notes, gold and silver certificates, ''green- 
backs," and national bank notes, together with checks, 
drafts, and the promissory notes of individuals and cor- 
porations ; all pass current in exchange for commodi- 
ties and for gold coin. They are received as money. 
If the pennies and notes were regarded simply as 
wealth they would not be so accepted. It is only as 
money, that is, as a title to wealth as yet not delivered 
or possibly not created, that they are accepted. Di- 
rectly as confidence in them prevails can business be 
conducted in a progressive society. 

In a primitive community wealth must be used as 
money, because no one can trust any one else and an 
exact economic equivalent must be delivered at once. 
The exact reverse is true of a highly civilized society; 
the promise is at least as good as the reality. Indeed, 
the degree of civilization may be inferred from the 
amount of wealth which a community uses as money. 
In this respect the United States is ahead of England ; 



30 The Economic Primer [Chap. 

England is ahead of France ; France is ahead of Ger- 
many, and Germany ahead of other countries.* The 
use of personal checks is constantly increasing in 
this country, and the use of coins and other kinds of 
government money is thus relatively diminished. 

Barter money is an evidence of economic insecurity, 
and of an undeveloped industrial condition. As the 
moral character of the community rises, and it becomes 
certain that a man will do as he agrees, the necessity of 
using wealth for money diminishes. Money is an 
efficient agent and evidence of progress only as it 
ceases to be made of wealth and is taken on faith, — as 
it assumes such form that it is received not for its own 
sake and for personal use, but exclusively with a view 
to its being transferred to others in trade. 

17. — Functions of Money. 

The use of money in facilitating exchanges, in fur- 
thering the complexity of trade, in substituting credit for 
actual wealth, has already been referred to. All these 
enable the members of a community to secure what 
they want, when they want it, and in quantities suited 
to their needs. 

But there is another function which money performs, 
and that is in creating a ''common denominative of 
value," by which the value of different quantities of 
wealth and service can be measured and compared. 

In order to do this successfully money must always 
have certain important characteristics, f 

(i) It must always, whatever its name, form or char- 
acter, have relation to a specific quantity of a definite 
kind of some particular article of consumption. In 
the United States, since 1837, the' standard monetary 

* A secretary of legation is my authority for the statement that enough 
coin changes hands every three months in Berlin in the payment of house 
rent to satisfy the needs of New York for a j'ear. 

t See Chevalier, La Monnaie, pp. is-i?- 



11.] Functions of Money 31 

unit, the dollar, has had relation to twenty-five and 
eight-tenths (25.8) grains of gold nine-tenths fine. In 
England, since 18 16, the standard monetary unit, the 
pound, has had relation to one hundred and thirteen 
(113) grains of gold, to which is added one-eleventh of 
its weight as alloy. ,A11 promises to pay in these coun- 
tries are, therefore, for dollars or pounds, although few 
of either are actually transferred as compared with 
the amount of money used every day in each country 
in the conduct of business. 

(2) The property used as a unit, and to which all 
money has reference, must possess a utility which is 
readily estimated by every one. It will inevitably be 
that which already circulates as barter money among 
that portion of the community which will not accept 
paper or credit money alone. The reason for this is 
very simple. Whoever accepts money in a transaction 
does so because the commodities at the disposal of the 
debtor or creditor are such as he does not desire for his 
own use or production. So long as the money will be 
accepted by those who do possess the commodities, it 
is unimportant what commodity it represents. But 
when it will not be accepted, it is necessary that the 
holder should be able to demand from those who issue 
the promise a specific kind of property, which those 
who declined to receive his money will accept. Other- 
wise commercial dealings will be restricted to the lim- 
ited area in which money freely circulates. So long, 
therefore, as we have commercial intercourse with any 
people who continue to insist upon barter money, or a 
large portion of the community are distrustful of those 
with whom they have business relations, all money must 
be promises to deliver upon demand a specific quantity 
of the commodity of which barter money is made. 

(3) As society advances, the articles of which money 
is made must contain an ever larger value in a small 



32 The Economic PrixMer [Chap. 

compass. It must have a high specific gravity indus- 
trially. Where wages are low, large coins of little value 
can be circulated. But where wages are high, coins of 
small size must have great value. Where wages are 
six cents a day, few people have use of a gold eagle, for 
it would contain what was to them a fortune. 

(4) It must be as nearly as possible unalterable in 
form and of such durability that its value will not 
deteriorate. 

(5) It should be of uniform quality and readily divis- 
ible, so that every unit will be the equal of every other. 

(6) Every form of money should be such that it can 
be readily recognized, and counterfeits or similar arti- 
cles quickly detected. 

(7) Above all, the monetary unit must be as free as 
possible from variations in value. Articles whose cost 
of production depends upon the season, or the process 
of whose manufacture is constantly changing, are unfit 
for a standard. 

Only the precious metals sufficiently combine all 
these qualities to constitute a good circulating medium. 
Useful, expensive, durable, homogeneous, readily rec- 
ognized and possessing a fair decree of stability of 
value, they are the money materials of the world. Con- 
venience of form is secured by coinage, what it shall 
be depending entirely upon the stage of industrial 
development the community has attained. 

A coin, however, is nothing more than a manufac- 
tured commodity; it is wealth, the weight and fineness 
being certified by the stamp. As part of the money of 
a civilized community, coins are a relic of barbarism. 
They show that a portion of the community is not yet 
up to that moral standard where barter money can be 
dispensed with. Instead of being the only form of real 
money, as some people regard them, coins of full 
weight and fineness perform the least important func- 



II.] The Money Function of Banks 33 

tion of money. A metallic currency is entirely inad- 
equate to meet the demands of modern trade and com- 
merce. To be forced to an actual transfer of metal for 
each exchange would paralyze the commerce of the 
world. In fact, only three per cent of clearings and less 
than one per cent of debts are paid in coin; while less 
than five per cent of debts are settled by using legal 
tender. It is sufficiently burdensome to carry a little 
change. 

18. — The Money Function of Banks. 

The real money of civilized society is the so-called' 
paper money, the difference between it and metallic 
currency being that the latter is both wealth and money 
while the former is only money; — it is the promise of 
wealth. Ricardo has well said that currency is in its 
most perfect state when it consists wholly of paper.* 
But that it be perfect, there must exist perfect confidence 
that currency can be exchanged for any form of prop- 
erty, including barter money, at the pleasure of the 
holders. It is the prime requisite of promises that they 
be kept absolutely. So far as money is concerned, this 
implies that all notes be absolutely convertible at all 
times. Any monetary system which does not secure 
this is uneconomic. One which makes notes nothing 
more than certificates of deposit, like warehouse 
receipts, is entirely insufficient. In such money there 
is no economy save in the prevention of abrasion of the 
coin. It is for these reasons that money must be issued 
by individuals and by corporations, not by govern- 
ments. 

The work of the early banks was to offer security for 
property against highway robbers, a function in which 
the safe-deposit companies have superseded the way- 
side inn. A second duty was to facilitate exchanges 

* Works of David Ricardo (McCulloch's Edition), page 218. 



34 The Economic Primer [Chap, 

by balancing credits, a work which has reached its 
highest development in a clearing house where the 
claims held by different banks, amounting to hundreds 
of millions daily, can be exchanged in less than ten 
minutes and are settled by the payment of only small 
amounts of legal tender. The third, and today the 
important feature of the banking business, is to lend 
and borrow capital, — the savings banks on more perma- 
ment forms of property and for longer periods, the 
banks of loan and discount on short time, and almost / 
entirely on goods in transit from the farm and the fac- 
tory to the point of consumption. Behind the promise 
of the latter banks lies the largest mountain of wealth 
and the strongest impulse to the creation of more 
wealth which exists in the community. Behind the 
promise of the fiat of the government rests only the 
clumsy power of taxation, the exercise of which cannot 
immediately add to the industrial power of the nation. 
Governments are manifestly incapable of performing 
the task of supplying all the money business men must 
use, nor does the treatment afforded its creditors by our 
own government warrant the conclusion that perfect 
confidence can be reposed in the absolute convertibility 
of its promises to pay dollars on demand. The bank- 
ing system with a central bank of redemption and gov- 
ernment supervision to insure the maintenance of a 
legal reserve may be expected to afford a safe system 
of note issues in the future as it has in the past* 

19. — Advantages of Personal Money. 

In the earlier stages of society the government sup- 
plied all the money, — the barons in the middle ages, 
and the kings and emperors later. But with the devel- 
opment of commerce since the sixteenth century, and 

*See "Path to Safe Banking and Currency," in the Social Economist for 
October, 1893. 



II.] Advantages of Personal Money 35 

the extension of manufactures in the nineteenth, the 
requirements of business have become too delicate and 
intricate for monarchs to control it. Public money or 
legal tender must be supplemented, though not sup- 
planted, by private money. It is probable that govern- 
ments will continue to supply, under absolute monop- 
oly, the token coins and small bills used in retail trade, 
and to do the actual work of coining with better results 
than we could expect from "absolute free trade in 
currency." But the right to have- wealth made into 
money, as in the free coinage of gold under our present 
system, will remain with the the individual citizen and 
with the corporation. Every man in business will also 
have the same right he now has to make and issue 
money, the only law restraining him being that his 
money shall not be made in imitation of that already 
in use by some one else, whether it be the government 
(counterfeiting) or a private individual (forgery). Thus 
may be supplied all that is required for the conduct of 
business. 

The quantity of legal tender money required in a 
highly complex industrial community is subject to sud- 
den and extreme variations. A change in the ratio of 
exports to imports ; an increase or decrease in the 
movement toward opening up new territory ; a change 
in our industrial relations with people who insist upon 
barter money exclusivel}^ ; — all affect the quantity of 
legal tender money required. The quick decision, ex- 
pert judgment and alertness necessary to adapt the 
currency to these ever-increasing variations, are pre- 
cisely what individual enterprise can supply. 

The government must act either upon a general rule 
or according to specific legislation : it cannot vary its 
action with sufficient promptness to meet the varying 
requirements of special emergencies necessarily arising 
in modern society. A stringency may arise, or even a 



36 The Economic Primer [Chap» 

panic, which will, before Congress can be called together, 
disturb the industrial relations of the whole country. 
Moreover, political considerations, rathei" than eco- 
nomic, are likely to have weight in the deliberations of 
a legislative body. All that is necessary in order to 
insure the ready adaptation of supply to demand is to 
have money furnished by private enterprise exactly in 
the same way that food, clothing, and other commod- 
ities are now, with the exception that the form and 
quality of the money shall be determined by law. 

This would involve government control or super- 
vision of the mint and of the printing of coin certifi- 
cates ; but money would really be furnished purely as 
a matter of business, and bankers sustain the same 
economic relations to the community as do all other 
merchants. They would increase their stock in the 
same way and for the same reasons that shoe mer- 
chants increase their stocks of shoes. Being responsible 
for the supply of barter-^money, bankers would lose 
their business, or succeed, according to the efficiency 
with which they supplied the monetary wants of the 
community. 

This change in our monetary system would take the 
gold and silver industries out of politics. Instead of 
lobbying in Congress to increase the market for, and 
fix the price of, their product, men interested in these 
industries would go into the open market on the same 
terms as other producers. The effect of this on these 
industries can hardly be overestimated. It would also 
take the whole question of the supply of money out of 
the field of political action and make it automatic, by 
leaving it to the action of economic forces and subject 
to economic law rather than statutes. We should thus 
obtain in our monetary system all the advantages of 
competition, business enterprise and skill, without the 
risk of adulterations and "tricks of the trade." We 



II.] A "Bimetallism" which is Possible 37 

should derive all the benefits of the exercise of the pro- 
tective power of the state without the bungling incom- 
petency inseparable from the public administration of 
industrial undertakings. 

20. — A "Bimetallism" which is Possible. 

Furthermore, the plan here proposed offers a means 
of settling the bimetallic controversy. Until a com- 
munity advances beyond the barter-money stage of 
industry the question of the value of its money is of 
little consequence, because the variations must be in- 
significant. But when real money comes to be used, 
when the larger part of the money work is done by 
credit instruments, and the promise of wealth is taken in 
trade instead of the wealth itself, the value of the mon- 
etary unit becomes a matter of vital importance. Slight 
variations may involve the welfare of thousands upon 
thousands of the population. 

As society develops, it becomes necessary to substi- 
tute the more for the less expensive monetary article, 
and this change is likely to entail some variation in the 
monetary unit. Today some countries can only use 
silver, while others must use gold, in part at least; 
when trade is carried on between countries using dif- 
ferent money materials because of their being un- 
equally developed industrially, successful business re- 
quires a stable par of exchange. It is this that gives 
special importance to our silver question. But thus far 
every scheme adopted for using two metals, under free 
coinage of both, has been unsuccessful because based 
upon the idea of keeping their relative values together 
by a fixed ratio of their quantity. Their respective 
values vary, however, because their costs of production 
vary. In the ninth century the proportion in which 
the two metals were of equal value was about 9 of sil- 
ver to I of gold ; under the Tudors, the ratio reached 



38 The Economic Primer [Chap. 

12 to I ; during the first three-quarters of this century- 
it fluctuated between 15 to i and 16 to i ; in 1892 it was 
22 to I ; the present market ratio (October, 1894) is 
about 30 to I. Clearly the free coinage of both metals 
by any government (national bimetallism) will not 
establish a permanent parity of value between them, as 
it can have no reference to the relative cost of produc- 
tion which determines the value of each. Whether it 
would be possible to establish a parity of value between 
them at any fixed ratio of quantity if all commercial 
nations were to agree on the ratio (international bi- 
metallism), is, to say the least, doubtful, the experi- 
ence of many countries for centuries showing that the 
values of a given quantity of two metals will not keep 
together for any considerable time. 

The currency experiences of the sixteenth century 
led Sir Thomas Gresham, financial agent of the English 
court at Antwerp, to formulate the economic law which 
has since borne his name — "bad money drives out 
good money." That is, if two kinds of money are de- 
clared by authority to be of equal legal value, the one 
having the lower cost of production drives the other 
out of circulation as soon as the difference in cost be- 
comes apparent. 

A fixed ratio of quantity will necessarily give a vary- 
ing ratio of value unless the margin of variation is 
small. It therefore becomes necessary to change the 
point of adjustment from quantity to value, if bimetal- 
lism is to be rendered possible. Instead of being coined 
in a ratio of quantity, metals must be coined in the 
ratio of value. Every silver dollar should be the eco- 
nomic equivalent of a gold dollar, without reference to 
the number of grains it contains. Instead of trying to 
perform the miracle of adjusting the value to the grains, 
we must reverse the process, and adjust the grains to 
the value. If every coin, of whatever metal, is equal 



II.] The Demand for Cheap Money 39 

in value to every other coin of the same denomination, 
then all reason for restricting the quantity will have 
disappeared, and coinage can be free. 

But little silver need actually be coined, however. 
Our own recent experience has shown that the silver 
dollar, like the gold dollar, is an inconvenient coin. 
All that is necessary is to have every silver certificate 
represent a dollar's worth of silver. This can be ac- 
complished in the same manner as investors are com- 
pelled to keep up their ** margin " with brokers. The 
price of silver does not fluctuate so rapidly that frequent 
changes in the deposit made by issuers of currency 
would be necessary. It would have to be immediately 
increased when the price of silver falls, in order to make 
the margin good. If more currency is desired, a new 
deposit would also have to be made. The banker 
would purchase more bullion and have it coined, or 
certificates issued, just as the shoe dealer increases his 
stock when the demand arises. In this way silver can 
be coined as freely as gold, for the same reasons, and 
with as much safety. Perhaps the greatest advantage 
in favor of this change in our monetary system is that 
it can be adopted in this country irrespective of the 
action of the rest of the world. We should have a mon- 
etary system in which in truth every dollar issued would 
be of the same value as every other dollar, not only 
as money, but also as bullion property, the world over, 

21. — The Demand for Cheap Money. 

It is commonly believed that it is for the interest of 
the community to have money " cheap." This entirely 
erroneous notion arises from confounding money with 
the capital that business men lend and borrow, and also 
from confusing the character of money with the nature 
of the wealth materials of which barter money has at 
times been made. The community is most deeply 



40 The Economic Primer ■ [Chap. 

interested in having wealth cheap; but as money is 
only the instrument used in exchanging wealth and 
service, which latter it is for the interest of the vast 
majority of the community to have dear, and is the 
measure of the ratio of exchange, every member of 
society has most concern in having the value of money 
as stationary as possible. Good money is that which 
is convenient in form and stable in value. The greater 
the stability in the value of money the more certain 
will be the equity of all exchanges, other things being 
equal. 

When the economic effect of a change in the value 
of money is equally distributed throughout all parts 
of the industrial body, no one can have the slightest 
profit therefrom; when the incidence of the impulse 
is unequal, a temporary interest is created. Creditors, 
or debtors, then hope to gain what some one else 
loses, — a gain resembling in character the result of 
theft. No permanent and economically self-perpetuat- 
ing interest is created. Farmers and laborers are, more- 
over, more likely to suffer from these variations, and are 
most interested in invariability in the value of money, 
as its efficiency, like that of weights and other measures 
used in trade, depends upon stability of character. 
Every one wants to know at all times just how much it 
is. Only mere money speculators can have an inter- 
est in promoting fluctuations in the value of money. 

A rise in the value of money, or a fall, may result 
from a change in the cost of obtaining the money ma- 
terial or from an arbitrary political action. Money 
falls in value when new mines are discovered, as in 
California and Australia or Colorado; it depreciates when 
confidence in the solvency of the issuer is weakened. 
Money is debased when the government unjustly 
diminishes the weight of the coin, as did Henry VIII,* 

* See Section 42, Chap. IV. 



II.] Summary Concerning Money 41 

so that it does not represent the property which it pre- 
tends to. An honest money-maker, like the mint of the 
United States, is necessary in order to prevent the 
decline through debasement. Commercial integrity and 
absolute convertibility at all times will alone secure the 
confidence which hinders depreciation. 

Summary Concerning Money. 

1. Coins are a form of wealth, the degree of civiliza- 
tion of any community being indicated by the extent to 
which it has dispensed with their use. 

2. Money is a non-interest-bearing obligation which 
passes current in the community at its face value in 
exchange for wealth and service. 

3. Money always has relation to a specific quantity 
of a definite kind of some particular commodity. This 
can be best determined by the government. 

4. Deposit banks doing a loan and discount business 
are best equipped for making sound money and deter- 
mining the quantity needed. Under proper regulations 
as to reserve and redemption they can readily adapt the 
supply of money to the industrial demand. 

5. Intelligent currency reform must be directed 
toward limiting the fluctuations in the value of the 
money unit or toward increasing the convenience of 
its forms. 

6. No bimetallism is possible which does not secure 
the equality of value in the various forms of the mone- 
tary unit. 



CHAPTER 



ON THE LAW OF PRICES 



22. — Definition of Value. 

Value is ratio of exchange ; — simply that and nothings 
more. In a broad sense, and the truest, it is the ratio 
in which man is obliged to give his services in exchange 
for wealth, — the social ratio of labor to gratification. 
In a narrower and the more common use of the term, 
if is the ratio in which quantities of commodities are 
exchanged. This latter kind of exchange is only the 
means to the end : various quantities of the different 
forms of wealth are nominally and directly the subject 
of trade, but in the last analysis trading is giving labor 
for the material things required to satisfy our physical, 
mental, and social desires. 

The products of industry have value only because 
and so long as some one is willing to give wealth or 
service in exchange for their possession. In order, 
therefore, that any particular article have value, (i) it 
must be useful ; (2) its utility must depend on the ex- 
penditure of human effort, and not on the bounty of 
nature ; and (3) the article must be transferable, in law 
and in fact. No one will consciously give anything 
for an article that is gratuitously supplied in nature 
and may be had for nothing, nor will people pay for 
something which they cannot really possess, of which 



Definition of Value 43 

the legal institutions of the community do not guaran- 
tee ownership. 

When effort is required to obtain useful things, it is 
put forth, and the thing acquired has value, primarily 
because the product of the effort is useful. No one 
continues to give anything voluntarily in exchange for 
something which will be of no use in the satisfaction 
of desire. Rather efforts are expended exactly in pro- 
portion as we think the resulting wealth will be useful. 
Consequently nothing can have great value, that is, 
have such qualities that its owner will be able to ex- 
change it at a high ratio per quantity, except as it has 
utility in a corresponding degree. Utility may be 
much greater than value, but it must at least equal 
value. Men and women do not work hard and long 
for that which satisfieth not. 

Things are dear or cheap at any given time and 
place according as a particular laborer must work a 
longer or shorter time to acquire them, that is, accord- 
ing to the ratio in which they will exchange for labor 
of a given quality. Certain things may be dear at fifty 
cents apiece in Mexico because wages are only twenty- 
five cents a day, but cheap at two dollars in the United 
States, where wages are two dollars and a half or three 
dollars a day. When it is said that the price of a com- 
modity has risen or fallen, it is implied that a larger or 
smaller quantity of money is required in exchange; but 
this statement has no social significance save as it 
means that it has become more or less difficult for man 
to obtain the commodity. Wheat cannot become dear 
to potatoes for the reason that wheat is neither pro- 
duced, nor bought, by potatoes. Wheat may be com- 
pared with potatoes, but it has no exchange relation to 
them because exchanges are always made by man and 
for man, with a view to the gratification of some de- 
sire, since he must directly or indirectly render some 



44 The Economic Primer [Chap. 

service to obtain wealth. His labor must ever be the 
ultimate standard of value, the unit by which are deter- 
mined the ratios at which commodities exchange. 

23. — Difference Between Value and Utility. 

There are many useful things for which, under ordi- 
nary circumstances, man is not obliged to work, such as 
air and sunlight. These are gratuitous means of grati- 
fying his desires, and, as every one has them, no one will 
give anything in exchange for them ; they can have no 
value. There is thus a fundamental difference between 
value and utility. The one is a quality of things 
which makes it desirable to possess them for their own 
sake ; they are useful. The other is not an inherent 
quality of articles, but the exchange relation between 
them — -a ratio that varies with time and place. There 
can be no such thing, therefore, as "intrinsic "value; it 
is a scientific absurdity. A single thing can have value 
only by comparison with other things and with man. 
An ounce of gold can no more have value in and of 
itself, than the number thirteen can have ratio. Nor 
can a particular commodity have value to an individual. 
Value is ratio of exchange, and it takes at least two to 
make a bargain. We speak metaphorically of the value of 
pure air, of friendship, of adversity, of rest as a restora- 
tive, or of the value to health of a perfectly calm and 
regular life. But we invariably mean the utility of each 
of these, the word always referring to the direct or the 
indirect want-gratifying qualities of some portion of 
man's environment. This quality has a purely personal 
significance. Each individual decides for himself how 
useful pure air or a friend may be, and whether they 
are worth the effort necessary to obtain them. Indeed, 
only the individual can determine utilities. Value is 
social. It is the vital impulse of societary circulation, 
the extent of the latter marking the difference between 



in.] Relation of Value to Wealth 45 

civilization and savagery and showing how far man is 
removed from Robinson Crusoe conditions. 

24. — Relation of Value to Wealth. 

Value, moreover, is a simple economic concept; there 
are not several kinds. Different degrees of value may 
exist, and the value of particular articles, as well as of 
commodities in general, be different at different times 
and in different places. But value is ever and always 
the ratio at which portions of wealth are exchanged 
directly for each other and indirectly for service. 
Value in use, value in exchange, natural value, normal 
value, market value, commercial value, use value, sub- 
jective value, objective value, are either unnecessary or 
incorrect attempts to modify the simple idea conveyed 
in the word value, and result in confounding value with 
utility, or with wealth. Wealth is the thing to be 
exchanged; value is the ratio in which a given quantity 
of wealth has exchanged, or is likely to be exchanged, 
for other wealth, or for service, — a mental estimate only 
of economic exchange relations. 

So unlike are wealth and value that it is the aim of 
society to increase the one and decrease the other. 
The welfare of the race is advanced only as wealth in 
general becomes more abundant and cheaper; as it 
exchanges for a smaller quantity of human effort, and 
its value declines. That labor is useful to humanity 
which increases the wealth of the community. It is of 
no use to society to increase value. No one desires 
books, clothes or food to become more expensive. No 
one wants new machines which raise the cost of pro- 
duction. Progress comes only with the fall in the 
value of all commodities as measured in human energy 
or service. Communities are rich in the quantity of 
good things, not in their relation to each other ; in 
wealth, not value. If we had twice as much wealth 



46 The Economic Primer [Chap. 

in the United States as at present, but it were twice as 
valuable, we would be no better off. We should have 
to work just as hard in proportion to the return obtained 
from our industry. In order to progress socially we 
must be able to get more wealth with the same effort 
or the same wealth by less work. Society progresses 
as wealth increases and value diminishes. This is 
possible only when through the use of machinery nature 
is forced to do a larger share of the work of creating 
social utilities. The alternative for individuals, as for 
nations, is makincr some one else labor for us, and that 
results either in robbery or slavery: it is not a step 
toward a higher civilization. 

25. — The Basis of Economic Equivalence. 

The law of prices involves the principle on which 
rests the equity of all human relations. If every one 
could secure the equivalent of all he gives in church 
and state, in public and private life, in the family and 
the school, in trade and in society, injustice would be 
eliminated from human life and an absolutely equitable 
reward received for human activities. Speculation 
plays such an important part in the production as well 
as the societary circulation of goods ; such prominence is 
given to the dishonesty of retail traders and to the gam- 
bling methods of men who cheat the innocent property 
holder of at least a portion of the value of his title ; such 
strenuous efforts are made to get something for nothing 
in our dealings with our fellow men and women, that 
we are quite apt to lose sight of the real nature of trade 
as in truth an exchange of economic equivalents. 

As already explained (Sec. 15), trade implies two 
simultaneous equations of two variables. Each boy 
offering to swap knives thinks he will be better off — be 
placed in a better economic condition by the trade ; 
that the ratio of cost to satisfaction will be less as a 



III.] The Basis of Economic Equivalence 



47 



result of the exchange. Nor can trade long continue, 
and hence be an economic exchange and a social fact 
for the scientific investigator to consider, unless each 
buyer and seller gains by the transaction and actually 
receives the economic equivalent for v^hat he gives. 
Exchanges in which one gains only what another loses, 
as in all betting, are highly uneconomic and tend to 
extinguish themselves by reason of the harm they inflict 
on all concerned. It is only the sales which tend to 
perpetuate themselves, because they promote general 
industrial and social v/ell-being that indicate the real 
character of trade. In these exchanges wealth is 
created because an increase of utility results from the 
transfer of ownership; each trader thinks that what he 
receives will be of more servtce to him in the satisfac- 
tion of his wants than what he gives, and each vv^ill 
continue to trade in a given way because, under the 
conditions of life and industry which prevail in the 
community of which they are members, the balance of 
pain and pleasure, of cost and satisfaction, is best main- 
tained in this process of exchange. If a man sells a 
farm of a thousand acres for a city lot having only a 
few feet frontage, he does so because the city lot will 
satisfy more of his wants than the farm will, or more 
completely satisfy the same wants. If a man sells 
a pair of shoes for a hat, or a dozen bushels of 
wheat for a suit of clothes, or fifty tons of coal for a 
piano, he does so because for him the hat or the 
clothes or the piano possesses greater utility. Some one 
else buys the shoes or the wheat or the coal because 
these articles are more useful to him, in the light of the 
effort he must put forth to get them. Each com.pares 
cost and satisfaction in the different hnes. Everywhere 
mankind is at work on this problem of comparing cost 
with returns, pain with pleasure. Ever-varying an- 
swers are given to this question by different portions of 



48 The Economic Primer [Chap. 

humanity as the years go by, and as a consequence, 
people move from place to place, or transfer their labor 
and capital from one industry to another. The result 
of this universal movement is to make the value or 
price of all commodities equal to their cost by making- 
the ratio of effort to satisfaction identical in the various 
branches of industry. In the long run, this reduces 
trade to an exchange of economic equivalents. 

26. — Value and Price Tend to Equal the Cost. 

It is common to conceive of all wealth as being ex- 
changed for money, and hence to speak of price as the 
amount of money one would like to get in exchange, 
or as the money value. But practically the value of 
anything is its price. There is absolutely no difference 
between these terms. Price, like value, expresses ratio 
of exchange and nothing else. Nothing is worth m.ore 
nor less than its price. This price. may vary from time 
to time, but there is a constant tendency to establish 
one price for each commodity in each market. The 
constant higgling in a free market brings buyers and 
sellers to a common point, above which no buyer is 
willing to buy, below which no seller is willing to sell. 

In the instances in which there appears to be more 
than one price for the same thing in a given market, it 
is clear that the conditions do not exist for free eco- 
nomic exchange. This manifests itself particularly in 
the retail trade. Here ignorance is greatest alike as to 
the quantity, quality, and cost of the article received. 
The ignorance and poverty of the average consumer 
make it possible to impose on him. He may be under 
pecuniary obligation to the dealer or ''in the habit of 
trading" with him, either of which relations creates 
an uneconomic condition, since it implies ignorance of 
the conditions under which the trade is taking place, 
or prevents action in accordance with knowledge. 



III.] Value and Price Tend to Equal the Cost 49 

If we assume that every one in the field of exchange 
is adequately informed as to the quantity, quality, and 
other conditions affecting the article which is the ob- 
ject of purchase and sale ; that it is an article which is 
not in a large measure influenced by cosmic forces ; 
that fraud and the numerous devices by which buyer 
or seller can get a dishonest advantage over the other 
have been eliminated; that all are free to seek their 
best interests ; — in a word, if we assum.e well-informed 
self-interest acting freely, it is invariably true that the 
price of any commodity tends to equal the cost of its 
production. Less than this the producer cannot regu- 
larly receive. More than this an intelligent consumer 
will not give. 

Under the simplest conditions of human existence 
man lives on the spontaneous fruits of the earth. His 
first demand is for game, but it is only after oft-repeated 
experiences have taught man that the bow and arrow 
will aid in the gratification of this desire that he feels 
the demand for a weapon and expends effort in procur- 
ing one. The implements of war and the chase will^ 
not be produced for market, however, until the price 
offered makes it more profitable to manufacture them 
than to hunt for a living. The same is true in modern 
society, where industry is most complex and labor 
most highly specialized, and where production is almost 
entirely for others, each receiving through exchange 
what he or she consumes. Nothing is regularly pro- 
duced for which the consumer does not stand ready to 
give an economic equivalent, because cost is a mini- 
mum price which farmer, manufacturer, trader, and 
every other producer must receive. He cannot con- 
stantly sell below cost. To maintain that he can, is to 
hold that in economics perpetual motion is possible, 
and that something can be made out of nothing. To 
sell at less than cost indefinitely is to invite bankruptcy, 



50 The Economic Primer [Chap. 

a course which people do not voluntarily pursue. It 
is true that a number of considerations may induce a 
merchant to sell particular articles below cost for a 
time, and even to part with everything he has at the 
moment below what it has cost him. He may have 
miscalculated the necessary cost of handling. He may 
not know the exact cost of reproducing or replacing the 
commodities in question. The cost may have changed 
between purchase and sale. He may be unexpectedly 
crowded by indebtedness previously incurred and 
forced to realize immediately. He may have over- 
estimated the market demand, or he may be using the 
commodity as a ''leader" to attract customers for other 
goods. But it will be observed in all of these instances 
that changes in price are not due to permanent eco- 
nomic influences. They are the result of uneconomic 
perturbations and are merely temporary fluctuations 
from the economic price level. One gets more and 
the other less than an equivalent in these particular 
instances. No merchant or manufacturer can continu- 
ously sell everything below cost, without in truth 
■^'giving away" his goods. 

Will the consumer give more than cost.? Equity 
clearly requires that he should not. And there are 
economic forces operating automatically to insure that 
he will not give even the "customary" rate of profit. 
Under the assumption of freedom of economic action 
the manufacturer can cease making one commodity 
and devote his energies to work in other lines when- 
ever the price, by falling belo-w the cost of production, 
ceases to be an economic equivalent. Under the same 
hypothetical condition the consumer will refuse to give 
his money, his services or his commodities in ex- 
change, and will become a producer of the particular 
article when the present manufacturer demands more 
than an economic equivalent, — more, that is, than will 



III.] The Effect of Competition 51 

afford him as much gratification as he could otherwise 
have obtained. This does not mean that the utility of 
the two articles is the same for different individuals. 
Indeed, utility varies infinitely according to the tastes, 
temperament, and idiosyncrasies of different people. 
Economic equivalence depends on equality in the 
amount of reluctant productive energy expended. Each 
compares cost and satisfaction in different lines, and all 
the power the producer has, in simple industry, to pre- 
vent the price of any article from falling below its cost of 
production, the consumer has in an equal degree to pre- 
vent its rising above that cost. If he knows the market, 
can change his business, and is disposed to seek his 
own best interest, the consumer can force the price 
down to, but not below, cost; producers cannot force it 
above the cost. Exchange can regularly take place at 
this point only, because here all exchanges are mutually 
advantageous and economic, tending to perpetuate 
themselves by the unconscious operation of the forces 
in society set in motion by intelligent self-interest. 
Through the exchange of commodities in the ratio of 
their costs of production, every one obtains an in- 
creased utility by giving an economic equivalent, and 
by gratifying the desires of others. • 

27. — The Effect of Competition. 

Competition, or business rivalry, is the economic 
force which tends to make price equal cost, and insures 
in the long run that commodities will exchange in the 
ratio of their costs of production. In simple economic 
conditions and in undeveloped primitive communities 
this industrial movement is confined to the competition 
of buyers, is not active and perfect, and hence trade is 
not equitable. In its crudest form this competition is 
the ''higgling of the market" where a laborer offers to 
buy second-hand clothing in the city street, or the 



52 The Economic Primer [Chap. 

farmer desires to trade out his butter and eggs at the 
country store; it is the direct barter of simple, homo- 
geneous society. It leads men to shave themselves, 
do their own cobbling, and slaughter the beef on the 
farm. 

But as society advances competition is transferred 
almost entirely to producers, for the reason that buyers 
cannot readily change their occupation but can readily 
change their place for trading. It becomes more per- 
fect, however, and reduces trade more accurately to an 
exchange of equivalents. As the circulation increases 
in volume and complexity, economic movement be- 
comes more instantaneous and automatic, and greater 
equity is attained. Competition has its more perfect 
work in reducing price to cost by distributing profits, 
which is its only true and efficient economic function. 

28. — Analysis of Cost of Production. 

It is not what a particular article has cost its present 
owner that fixes its price, save when it represents 
what will have to be spent to replace it Labor and 
capital once spent in the production of an article have 
little to do with its value. It is the amount of effort 
necessary to place another equally satisfactory article 
on the market that fixes what can be obtained for it in 
exchange. This can always be reduced to labor cost. 
In every instance value is made up of three items: cost 
of labor, cost of raw materials, and cost of tools; but, 
since each of latter two can again be resolved into three 
parts as long as either enters into the process of produc- 
tion, in the last analysis it will be found that labor cost 
is all that remains. 

In order that laborers may be able continuously to 
supply their productive energy, they must regularly, 
receive from an enterprise as much as they have put into 
it; their wages must equal the cost of living of them- 



III.] Differential Costs 53 

selves and their families. It is absolutely impossible 
for the employer to obtain the service of a laborer con- 
tinuously for lower wages than will afford him a living. 
A given amount of effort involves a definite cost to the 
laborer, and he cannot continue to render the service 
unless in return he receives this cost. The same is 
true of the raw material and tools in the hands of the 
manufacturer. He must obtain from the product enough 
to equal the wear and teaV of the machinery and the cost 
of raw materials, for otherwise the one will soon dis- 
appear and the other not be brought to market. Labor, 
land, capital and the industrial enterprise required in 
organization are each and all requisite to the produc- 
tion of wealth. The owner of each must receive from 
the product the equivalent of what he contributes to 
the product. Nor can he obtain more; all are governed 
by the same law. In the simple conditions where all 
laborers are about alike, land is equally poor, and capi- 
tal easily acquired, there the redistribution of labor and 
capital is easy because costs are uniform, and it is clear 
the laborer will get what it costs him to live, the land- 
lord only the cost of utilizing the land, the capitalist the 
equivalent of the cost of what he contributes, and the 
manager of an enterprise his living, for the work of 
superintendence. It is only when differential costs 
arise that laborers can save, landlords obtain rent, capi- 
talists secure interest, and business men reap profits. 

29, — Differential Costs. 

As society develops and industry becomes more 
highly specialized, costs cease to be uniform. Almost 
no commodities are regularly produced for the market 
at a uniform cost for the whole supply, and very few 
ever have been. In the manufacture of cotton cloth, 
for instance, there are probably differences of half a 
cent a yard in the costs of production in the different 



54 The Economic Primer [Chap. 

mills in eastern Massachusetts, due to differences in 
method, in location of plant, quantity of capital, quality 
of machinery, or in any one of a large number of par- 
ticulars which distinguish one factory from another. 

Everywhere in modern industry there are differential 
costs, and under the influence of competition among 
producers, price tends to equal cost in the dearest fac- 
tory. The following diagram is designed to illustrate 
the relation of cost to price: 

GROUPS OF PRICE ACTUAL COST PROFIT 

MANUFAC- OF OF PER 

TURERS. PRODUCT. PRODUCTION. YARD. 

A 3 cents. 2x1 cents, xe cent. Minimum cost. 
B " 2| '* 1 " 

C(( ,, 1 3 < < _3 <( 

^S 8 

■p (( ^15 (( 1 ii 

■^ ^16 16 

F " 3 " o " Maximum cost. 

The manufacturers of each group pay the same rate 
of wages (|2), and sell at the uniform price, which 
equals the cost of production in the least efficient group 
of men in the business. So long as the manufacturers 
of this group (F) remain in the market they must receive 
their cost of production in the price of the finished 
product, and all the others will obtain the same, de- 
riving their profit from their superior economic effi- 
ciency The other manufacturers could afford to take 
less, but all together they do not produce the amount 
of cotton cloth the community stands ready to pay for 
at the greatest cost. The product of group F is "nec- 
essary." The manufacturer in group F gives and re- 
ceives exactly quid pro quo, and has no profit, — his 
living being part of necessary cost. The other five 
give the same equivalent, but have a surplus equal to 
the amount by which they are able to reduce the cost 
of production below that of the price-fixing group of 



III.] 



Differential Costs 



55 



manufacturers. This is perfectly equitable, because it 
comes from making nature do the work, and not by- 
robbery of the laborers, as socialists maintain. 



GROUPS 




J 


ACTUAL COS! 


^ SAVINGS 




OF 


WAGES. 


OF 


PER 




ABORERS. 






LIVING. 


DAY. 




A 


$2 


.00 


$2.00 


cents. 


Maximum cost 


B 






1.95 


5 " 




C 






1.90 


10 ** 




D 






1.85 


15 " 




E 






1.80 


20 ** 




F 






1-75 


25 " 


Minimum cost 



The same principle applies to wages, the price paid 
for labor. (See diagram.) All laborers receive what 
those demand who live most expensively. If these are 
employed they must have the cost of their living, and 
what they must have all others can get, quite irrespec- 
tive of their own cost of living. The laborers who live 
most expensively thus come into contact and contest 
with the least efficient employers. In a certain sense, 
laborers in group A represent the community and the 
interest of consumers. They personify demand seek- 
ing a supply for its wants. It is their common interest 
to lower the maximum cost and thus make possible 
either lower prices, higher wages, or both. This is 
illustrated in the cotton manufacturing industry, for 
example; there wages have risen 100 per cent in England 
and 115 per cent in this country during the century; 
prices have fallen from thirty cents a yard to less than 
three, and the business has remained profitable, 
although the individual high-profit manufacturer has 
been lowered seven successive times to the position of 
no-profit entrepeneur. Progress thus consists in raising 
the wages of the most expensive laborers and lowering 
the maximum cost to producers by repeated drafts on 
the storehouse of nature. 



56 The Economic Primer [Chap. 

30. — Sequence of Price Phenomena. 

The word price has been used as referring to general 
industrial conditions — as signifying the level toward 
which temporary fluctuations in prices tend to gravitate, 
and not the result of some special sale. The price of 
wheat, speaking generally, is the ratio at which it ex- 
changes on some central market, like New York^ Chicago 
or Liverpool, throughout a considerable period of time — 
not on a particular day in midwinter or at a small 
interior town in Russia. Society is not interested in 
the prices at auction sales, except to eliminate them, 
but in the usual exchange relation. This is the result 
of the action and reaction of the closely related and 
interdependent forces, demand and supply, and the 
somewhat stable equilibrium established between them 
in a socially systematic way. 

Interest consequently centers in cost, that regulates 
the movement. 

In the same way that consumption is the incentive to 
and measure of production, cost limits supply; it is the 
obstacle to be overcome in the creation of wealth. 
Through price, demand exercises a controlling influence 
over supply. ** Wants, efforts, satisfactions" is the 
circle of economic activity, but the second step is only 
the means by which the first motive is actualized in the 
third condition. Today's wants determine tomorrow's 
efforts; yesterday's actual consumption determines the 
direction and extent of today's production. But while 
demand is thus the cause of supply, a continuous supply 
will be forthcoming only as demand is strong enough 
to insure the giving of an economic equivalent for the 
efforts expended in production. 

Demand, not competition, is the life of trade De- 
mand always means want and consumption, howso- 
ever complex the industrial relations may be; supply 



III.] Sequence of Price Phenomena 57 

means personal service and production. The supply 
must depend on demand at a price which will equal 
cost. It is effectual demand that creates price; price 
induces production; cost limits supply. This is why 
mankind always lives from hand to mouth and does 
not produce more than will maintain the normal cur- 
rent in any state of civilization. Production cannot be 
much in advance of consumption, nor the world's 
aggregate wealth much in excess of the aggregate 
wants of the people of the world. Demand is deter- 
mined by the habitual wants and the social character 
of the mass of the people. As a consequence, nothing 
can permanently increase the quantity and reduce the 
cost of wealth which does not multiply the wants, 
extend the life, enlarge the consumption, and thus 
expand the social character of the community. 

Supply involves cost. This is the obstacle which 
price must overcome by equaling it. So long as demand 
is not correctly anticipated or the utility of an article 
accurately estimated, industrial fluctuations occur. 
When the cost level rises so that price does not cover 
expenditure, loss, failure and bankruptcy ensue. A con- 
tinuous supply will be maintained only at a price equal 
to cost. 

This does not mean that the price at which each 
article is sold is determined by the cost of producing 
that particular article, nor by the average cost of mak- 
ing that kind of an article, but the cost of replacing it. 
This equals the cost of producing the economic substi- 
tute or of producing that portion of the necessary sup- 
ply which is produced under the greatest disadvantages. 
Competition forces prices toward cost. When the cost 
level is so low that a liberal margin of profit exists for all 
engaged in any enterprise, other labor and capital will 
be directed toward this channel of production and an 
equilibrium established on the basis of a price which 



58 The Economic Primer [Chap. 

equals the cost. Cost is the economic point below 
which competition cannot permanently force prices and 
above which competition will not permit them to be 
maintained. It is therefore the point of equilibrium— 
the point at which trade becomes mutually profitable 
and permanent because it is an exchange of economic 
equivalents. 

This is true of agricultural as well as of manufact- 
ured products ; it applies to trade among barbarians 
who are but just beginning to barter within narrow 
limits, and, in a more perfect way, to the trade of the 
United States with all its variety and complexity. This 
explanation of price phenomena accounts for the daily 
fluctuations as well as for the average rate of exchange : 
they are the result of changes in cost. "No variation 
of demand, unaccompanied by a variation in the cost 
or real value of commodities, has any lasting influence 
over prices."* 

Changes in the quantity of goods in a market cannot 
affect value save as the increased or diminished supply 
is accompanied by a change in cost, or is occasioned by 
a forced sale. The price of agricultural products, for 
instance, seems to vary with changes in the quantitative 
ratio of supply to demand ; but it does so because the 
change in quantity has entailed a change in the cost 
per unit. So evident is this, that farmers are habitually 
complaining because they do not get any more for a 
large crop, which results from good weather, than they 
do for a small one. In truth, the price in each instance 
gravitates toward the cost of raising the most expensive 
portion marketed, whether the major part of this was pro- 
duced in America, as in 1889, or in Russia, as in 1892. 

Toward the same limit the daily variations are con- 
stantly tending. Each day it is known with reasonable 
accuracy where every bushel of wheat in existence is 

* McCuUoch, " Principles of Political Economy," Fourth Edition, p. 333. 



III.] Importance of the Market 59 

to be found. The members of boards of trade and of ex- 
changes are constantly estimating the cost of getting 
the most expensive bushels that will be paid for into 
the market at a particular place, and make their *' con- 
tracts to deliver " on the basis of their knowledge of 
market conditions. 

31. — Importance of the Market. 

The extent of the market is often an all-important ele- 
ment in determining economic conditions and relations. 
The sententious phrase of Professor Perry,* " a market 
for products is products in market," suggests an impor- 
tant truth. It often happens that the condition of success 
in the adoption of a new method in production is a 
larger market for the products. But it is entirely out- 
side the province and power of capital to create the 
conditions of its own successful employment. Other- 
wise capital would never be idly waiting in hundreds 
of millions of dollars for profitable investment, and the 
bankruptcies and industrial depressions which char- 
acterize modern industry would be impossible. Capi- 
tal is a tool, an instrument, a means; and its function 
is to supply markets, not to create them. Commodities 
are supplied only because there is a demand for them, 
not sold because they can be produced; consequently 
the new capital or improved machinery will be used, 
steam and electricity will be substituted for muscle, 
only when it is possible to reduce the cost per unit by 
marketing the whole of the larger product. As the cost 
of the whole must be met by the amount sold, the suc- 
cess of a machine which will greatly multiply the out- 
put thus depends on selling the increased quantity. 
Something more than a mere addition to the capital in 
existence is necessary to make its economic use possi- 
ble because profitable. 

" Principles of Political Economy," p. 185. 



6o The Economic Primer [Chap. 

Not only is it true that those articles have value for 
which alone some one stands ready to give something 
in exchange, but it is equally important to note that the 
value of a great many commodities at any particular 
time and place is due in large measure to the people 
who have wants to satisfy and who stand ready to give 
an economic equivalent. It may not pay to produce 
one hundred, but if ten thousand are required the cost 
per unit may be considerably less and the commodity 
find a market. 

Professor Perry's formula fails to take into full con- 
sideration that the tender of service may be quite as 
much a market for products as the products themselves, 
and that service is all that the vast majority of man- 
kind, the laborers, have to offer. It is because of the 
economic relation which wages bear to the extent of 
the market, and the extent of the market to price, that 
makes the seeming paradox an all-important social 
truth, that high wages and low prices are correlative, 
and that a rise in the general rate of wag-es tends to 
lower the cost of production per unit of product and 
extend the use of machinery. Merely to discharge 
laborers is to reduce the market for goods. If the use 
of capital involved only their discharge, capitalists 
would in truth be the enemies of laborers. But there is 
no motive to produce more or to produce more cheaply 
if no one buys. It is thus in the new desires and 
greater capacities for pleasure that laborers and capital- 
ists find a common interest, the one in higher wages 
and the other in wider use for his possessions and the 
incentive to increase them. 

High wages do not produce lower prices instantane- 
ously, however, but through the gradual social effect of 
the possiblehigher standard of living, and the new desires 
which are at once the occasion and the means of higher 
wages and lower prices. Lowering the cost of produc- 



III.] The Movement of Prices 6i 

tion through the widening of the market is consequently 
a slow process requiring large additions to the capital 
engaged in industry. A particular manufacturer can- 
not sell at a low price because he pays high wages; 
but low prices accompany high wages in any commu- 
nity, because high wages imply a widening market and 
consequently a larger use of the forces of nature. 

32. — The Movement of Prices. 

The striking fact in the recent history of prices is the 
decline in the price of manufactured goods. Wages, on 
the other hand, have pretty regularly increased, and the 
prices of several agricultural products have risen as 
much or more than wages have in the present century. 
Clearly this is not due to changes in the ratio of supply 
to demand. Manufactured goods are cheaper than ever 
before, and there are also more of them. But it has 
never been true for any length of time that there were 
not laborers in the market seeking employment. More- 
over, the disparity between agricultural and hand-made 
products on the one side and manufactured goods on 
the other, in the matter of price variation, is greatest 
in the most highly civilized countries. Quantitative 
changes do not account for the movement. 

Changes in the ''visible supply" are readily ob- 
served; they are among the things people can see. 
But in truth they are only the accompanying incidents 
of price variation; the unrecognized cause is a change 
in the cost per unit of a considerable portion of the 
supply. When the change is due to the action of cosmic 
forces, as is apt to be the case with agricultural products, 
price and quantity vary inversely; the added supply 
reduces average cost, so that a cotton crop in 1840 only 
brings as much on the market as that of 181 5, which was 
one-sixth as large, * and seven leading crops in the United 

* See Carey's " Harmony of Interests." 



62 The Economic Primer [Chap. 

States, as shown by the reports of the Department of 
Agriculture, can be sold in a scant year ( 1 88 1) for more 
money than the same seven crops in an abundant year 
(1880). Exactly the same result follows the larger use 
of capital (natural forces) in industry, increase in pro- 
duction being accompanied by a decline in price, 
because the cost per unit of product has been lowered 
through the use of new machinery and better organiza- 
tion and consolidation of plant. The production of pig 
iron has been doubled, but the price reduced one-half, 
in twenty years. Cost of transportation has been re- 
duced from three cents to three-eighths of a cent per ton 
mile for freight on the N. Y. C. & H. R. R. R., and from 
four cents to less than one for passengers. A telegram 
from New York to Chicago which cost $,2.20 in 1866 is 
sent today for forty cents. While the production has 
steadily increased, the price of print cloth has declined 
from seventeen cents per yard to less than three ; of 
steel rails from I158 in 1868 to $26. 50 per ton; of crude 
oil from 9.42 cents per gallon in 1873 to 1.59 cents in 
1887, and of refined oil from 23.59 cents to 6^ cents 
per gallon in the same period.* 

Increased costs come where nature cannot be utilized 
either directly or through the investment of capital, and 
where the labor cost has risen because men and women 
have insisted on the wages necessary to a higher stand- 
ard of living. The Hoe press, for instance, has made 
books and papers cheap, although the price of typeset- 
ing has more than doubled; but it costs fifty per cent 
more to build a house in New York today than it did 
a generation ago, because bricklayers, masons, car- 
penters and painters all get higher wages, and in this 
instance machinery cannot be used to any large extent. 

As the conclusion of the whole matter we have then 

* For further illustration see Report (Senate) Finance Com., March 3, 
1893; First Report (U.S.) Bureau of Labor, 1886; Wells, "Recent Economic 
Changes"; Atkinson, "The Distribution of Products." 



III.] Summary 63 

the following law of prices, ^hat is, the statement of 
the way price-creating forces act at all times and under 
all conditions: prices both of commodities and of service 

TEND TO EQUAL THE COST OF CONTINUOUSLY PRODUCING THE 
MOST EXPENSIVE PORTION OF THE SUPPLY NECESSARY IN ANY 
MARKET. 

Summary. 

1. Demand is the cause of supply, — the active force 
to which supply is the social response. 

2. Demand, to insure a supply, must be at a price 
equal to the cost of furnishing the dearest portion of the 
regular supply. 

3. Trade is a part of the process of the production of 
wealth, and to be continuous must be an exchange of 
economic equivalents. 

4. Cost is the point to which competition drives 
prices, and thus different quantities of various kinds of 
wealth and service can be exchanged as economic 
equivalents; they represent the same amount of eco- 
nomic expenditure. 

5. Industrial fluctuations are inversely to the degree 
of economic knowledge and the freedom of economic 
movement. 

6. Cost of production is ultimately determined by the 
price of labor. High wages usually imply low labor 
cost. 

7. Wealth and service vary inversely in price, pro- 
gress consisting of a fall in the value of commodities 
and a rise in the value of labor; that is, the prices of 
goods decline as wants increase in number and com- 
plexity, and as man becomes dear. 



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